Litigation Alert: District Court Rules that Shrinkwrap Agreement May Be Enforceable

April 21, 2006

Publication Profile

On April 5, 2006, the District Court for the Eastern District of
California ruled in the case of Meridian Project Systems, Inc.
v. Hardin Construction Co., L.L.C., Civ.04-2728, that an End
User License Agreement ("EULA") contained within software
packaging may be an enforceable "shrinkwrap" agreement.
The Court further found that a contract action based on the
EULA would not be preempted by the Copyright Act.

Facts

Plaintiff Meridian Project Systems provides software solutions
to manage construction projects, including the project
management software Prolog Manager. Meridian's standard
practice was to send Prolog customers a box containing a CD,
a user manual, and a copy of the EULA. The EULA sets forth
the terms of use, which a purchaser can reject by returning the
software. Defendant Hardin Construction had purchased and
used Prolog Manager in connection with its business since 1996
and had never returned any copies or objected to the terms of
the EULA.

Meridian brought suit, among other things, for breach of
contract and copyright infringement when Hardin violated terms
of the EULA by copying and sending Prolog help file text to a
competing software company. In opposing Meridian's summary
judgment motion, Hardin contended, inter alia, that the validity
of shrinkwrap licenses has not yet been determined by the
Ninth Circuit, and that in any event a contract action based on
such copying would be preempted by the Copyright Act.

Decision

The Court acknowledged that, although shrinkwrap licenses are
widely used in the software industry, there remains a dispute
across Federal Circuits about their validity. Some courts have
found such licenses invalid as unconscionable or unacceptable
contracts of adhesion, while other courts have held that these
types of licenses are valid and enforceable contracts.

The Meridian court found the EULA to be enforceable here
notwithstanding the fact that Hardin could not review the license until it had already opened the package. It based its
conclusion primarily on the Seventh Circuit's decision in ProCD,
Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). In ProCD, the
Seventh Circuit found shrinkwrap licenses enforceable against
end-users, basing its conclusion on policy considerations
specific to the software industry, an industry in which many
purchases are made over the Internet by consumers who
never see a box. The ProCD court noted that the reality of
the software industry is such that a license should not be
unenforceable simply because the consumer was not able to
read it before purchasing the product. The Seventh Circuit
provided several examples in other areas where contracts are
enforceable in a "pay first, agree later" form, including travel
and concert tickets.

Here, the Meridian opinion noted that Hardin was provided
with and had notice of the EULA. Hardin could have returned
the software if it did not agree with the license terms, but it
chose not to do so. Under these facts, the Court concluded
that the EULA was neither an unconscionable contract nor an
unacceptable contract of adhesion. The Court further found that
Meridian's contract action was not preempted by the Copyright
Act because it contained an "extra element" – the mutual
assent and consideration required by a contract claim.

Impact

While the issue of enforceability of such agreements has not
been decided by the Ninth Circuit, this case adds to the growing
body of case law in California District Courts suggesting that
shrinkwrap agreements are enforceable, even when they are
not visible to customers at the time of purchase.

If you have questions about the issues raised in this alert,
please contact:

This update is intended by Fenwick & West LLP to summarize recent developments in the law. It is not intended, and should not be
regarded, as legal advice. Readers who have particular questions about these issues should seek advice of counsel.